Tax Refund Disqualify Medicaid Beneficiary

To answer this question, some background information must be covered. First, it is important to be aware that federal income tax refunds and state income tax refunds for Medicaid purposes may be treated differently based on the state in which one resides.

The 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act set forth federal rules to which every state Medicaid agency must adhere. Federal income tax refunds do not count as income for Medicaid purposes, which means a refund cannot cause a Medicaid recipient to be over Medicaid’s monthly income limit. Furthermore, Medicaid does not count federal tax refunds as assets for 12-months following the receipt of the money. During this timeframe, Medicaid recipients will not be in jeopardy of losing their Medicaid benefits, nor can nursing homes demand that Medicaid beneficiaries use their tax refunds towards their cost of care.

If the money is not spent within the 12-month period, any remaining money will count towards Medicaid’s asset limit. Unfortunately, if this pushes the Medicaid recipient’s assets over the limit, one may be ineligible for continuing Medicaid benefits. (In most states, the asset limit is $2,000. See asset limits by state). Therefore, it is important to spend the money within 12-months of receipt.

While there is a Medicaid Look Back Rule in which a Medicaid recipient is forbidden to gift money, the tax refund is exempt from this rule during the 12-month period. This means that a Medicaid recipient can give the money to an adult child for travel, to a valued charity, or to a grandchild for college within this timeframe without risk of losing Medicaid benefits.

A Medicaid recipient should not use the funds towards assets that are counted towards Medicaid’s asset limit. The purchase of non-exempt assets, such as U.S. savings bonds, will be counted towards the asset limit, which could cause a Medicaid recipient to have “excess” assets. Examples of ways in which the refund can be spent and not considered countable assets includes clothing, pampering (such as a hair appointment or a massage), a new reclining chair, or an Irrevocable Funeral Trust.

The 2010 Tax Relief provisions are also applicable for persons wishing to apply for Medicaid. For both Medicaid applicants and beneficiaries, it is important that one has documentation indicating that the money is from a federal tax refund and that it was received within the last 12-months.

Unfortunately, the 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act does not extend to state income tax refunds. However, states have the authority to treat these refunds in the same manner as federal tax returns. Unfortunately, very little information could be found as to how the various states handle state income tax refunds for Medicaid purposes.

It is our assumption that nursing homes cannot demand Medicaid recipients turn over their state tax refunds. Rather, it is believed that a state tax refund, like a federal tax refund, will need to be “spent down” so that one does not have assets that exceed Medicaid’s asset limit. (Although the Medicaid recipient may have to spend down the extra money in a much shorter timeframe than for federal tax return refunds). One should be cautious not to purchase items that would be counted towards Medicaid’s asset limit (i.e., assets that are easily converted to cash). Furthermore, given it is unclear how state Medicaid agencies handle state income tax refunds, one should not give the money away, as doing so might violate Medicaid’s Look-Back Rule. For additional information as to how the Medicaid agency in your state treats state income tax refunds, it is strongly suggested that you contact your state Medicaid agency.